Monty Leasing Company agrees to lease equipment to Flounder Corporation on January 1, 2020. The following information relates to the lease agreement.

1.		The term of the lease is 7 years with no renewal option, and the machinery has an estimated economic life of 9 years.
2.		The cost of the machinery is $561,000, and the fair value of the asset on January 1, 2020, is $763,000.
3.		At the end of the lease term, the asset reverts to the lessor and has a guaranteed residual value of $55,000. Flounder estimates that the expected residual value at the end of the lease term will be 55,000. Flounder amortizes all of its leased equipment on a straight-line basis.
4.		The lease agreement requires equal annual rental payments, beginning on January 1, 2020.
5.		The collectibility of the lease payments is probable.
6.		Monty desires a 10% rate of return on its investments. Flounders incremental borrowing rate is 11%, and the lessors implicit rate is unknown.

(Assume the accounting period ends on December 31.)

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Your answer is correct. Discuss the nature of this lease for both the lessee and the lessor. This is a finance lease for Flounder. This is a sales-type lease for Monty. eTextbook and Media List of Accounts * Your answer is incorrect. Calculate the amount of the annual rental payment required. (Round present value factor calculations to 5 decimal places, eg. 1.25124 and the final answer to decimal places eg. 58,972.) Annual rental payment $ 135339 e Textbook and Media List of Accounts X Your answer is incorrect. Compute the value of the lease liability to the lessee. (Round present value factor calculations to 5 decimal places, eg. 1.25124 and the final answer to decimal places eg. 58,972.) Present value of minimum lease payments $ 707896 eTextbook and Media List of Accounts Prepare the journal entries Flounder would make in 2020 and 2021 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry for the account titles and enter for the amounts. Round answers to decimal places eg. 58,972. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit 20 Right-of-Use Asset 707896 Lease Liability 707896 (To record the lease.) Lease Liability 135339 Cash 135339 (To record lease payment.) 31/20 Interest Expense 62981 62981 Lezse Llability (To record amortization.) Amortization Expense 101128 Right-of-Use Asset 10128 (To record interest.) 21 Lease Liability 135339 Cash 135339 31/21 Interest Expense 55022 Lease Llability 55022 (To record amortization.) Amortization Expense 101128 Right-of-Use Asset 101128 (To record interest.) Prepare the journal entries Monty would make in 2020 and 2021 related to the lease arrangement. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry for the account titles and enter for the amounts. Round answers to decimal places eg. 58,972. Record journal entries in the order presented in the problem.) Date Account Titles and Explanation Debit Credit 1/1/20 Lease Receivable 753000 Cost of Goods Sold 561000 Sales Revenue Inventory (To record the lease.) 1/1/20 Cash 135339 Lease Recevable (To record lease payment.) 12/31/20 Lease Recevable Interest Revenue 1/1/21 Cash 135399 Lease Recevable 12/31/21 Lease Recevable Interest Revenue X Your answer is incorrect. Suppose Flounder expects the residual value at the end of the lease term to be $45.000 but still guarantees a residual of $55.000. Compute the value of the lease liability at lease commencement. Lease liability $ 712713 eTextbook and Media List of Accounts